With less than twenty weeks to go before the OECD Automated Exchange Of Information (AEOI), OECD Common Reporting Standard (CRS) and DAC regulation takes effect in the UK, HMRC have released the draft guidance for how UK Financial Institutions should implement these rules, and how they will interact with previous international tax regulations such as FATCA and CDOT. This article will provide you with an introduction to what the draft entails and what we can potentially expect in the final guidance.

Time scales

The OECD/CRS implementation is not staggered in the UK and from day one, first of January 2016, the OECD/CRS regulation will require entities to report on the complete data set.

Implementation Timelines

FATCA

CDOT

UK* DAC/CRS

Pre-existing financial accounts to be
subjected to due diligence procedures are those in existence as at:

30/06/14

30/06/14

31/12/15

New financial accounts requiring
self-certification by the customer are those opened on or after:

01/07/14

01/07/14

01/01/16

First reporting period ends on:

31/12/14

31/12/14

31/12/16

Information to be reported by
financial institutions to HMRC in respect of the first reporting period on or
before:

31/05/15

31/05/16

31/05/17

Information to be exchanged by HMRC
with partner jurisdictions on or before:

30/09/15

30/09/16

30/09/17

*All OECD/CRS and EU DAC participating countries will have similar deadlines. However reporting dates to local tax authorities are likely to be the tax year reporting date, which in the UK is 31st of May 2017. With the exception of Austria, all EU countries will implement the regulation in 2016, reporting from 2017, including all OECD/CRS early adopters. Austria is implementing DAC/CRS in 2017, reporting 2018 due to local requirements.

Three regulations in one

OECD/CRS is three separate regulations, where OECD Automated Exchange of Information (AEOI) is the base regulation as set out by the Organisation for Economic Co-operation and Development. It is split into two parts:
-OECD Common Reporting Standard (OECD/CRS) is the regulation that Financial Institutions in affected jurisdictions must comply with.
-OECD Competent Authority Agreement (OECD/CAA) is the contract between jurisdictions. A jurisdiction is a participating jurisdiction once a CAA has been signed and will be reportable in accordance with that contract.

EU/DAC refers to the EU directives that are written into EU law. These directives extend the OECD/CRS to some degree and all EU member and Financial Institutions who are tax residents of EU must comply with these directives as well as OECD/CRS.

UK DAC/CRS is the UK Implementation of the OECD/CRS with the extensions stated in the DAC. All Financial Institutions who are tax residents in the UK must comply with UK DAC/CRS and by doing so will be compliant both with the OECD/CRS and EU/DAC respectively.

Regulatory impact

Alignment with local regulation

UK DAC/CRS is aligned with UK regulation rather than global or US regulation giving preference to use prior regulation as reference rather than creating a regulatory specific set of tests. For example, under UK DAC/CRS Depository Institutions will be any institutions that fall under articles within the Services and Markets Act 2000, there are then a small number of additional tests to clarify this classification. In the case of FATCA, the regulation only sets out a set of regulatory specific tests to determine if the entity is a Depository Institution.

This may mean that some classifications differ slightly between FATCA and UK DAC/CRS, although it does also reduce the chances of having classifications which do not match or even exists in certain jurisdictions. It should also remove most grey areas, for example, under FATCA Contract For Difference (CFD) products causes an issue. These can legally not be traded in the US, and hence the FATCA regulation does not contain rules for these. Identifying if these products constitutes Financial Accounts are problematic, but by aligning to local regulations we should see less of these. It is too early to tell if the differences this bring to FATCA and UK DAC/CRS will cause other issues though.

Three part obligation

The UK DAC/CRS has a similar structure to FATCA and CDOT in that an activity has to meet three criteria for it to be reportable. Namely,

The Financial Institution (FI) providing the account must be reportable

The account holder must be reportable

The account itself needs to be reportable.

As such, if any of these three aspects can be discounted as never presenting a reporting obligation, then that group, activity or entity can be seen as non-reportable without further investigation.

For example, if an entity is classed as a Financial Institution, and holds Financial Accounts which meet the criteria for Reportable Financial Accounts, if that company categorically only provides services to listed companies (non-reportable account holders), they can NIL report as long as they do not take on new customers who are not listed companies.

Exemptions

The exemptions under UK DAC/CRS seem to use the function of the Financial Institution as an indicator of inclusion rather than setting up new categories based on internal tests. This results in clearer and wider definitions than FATCA and CDOT, where in both cases the exemptions were very narrow based on a number of rules set by the regulator.

For example, “Execution Only Brokers” as a Custodial Institution has been stated as an exempt entity, and in the draft guidance the only stated exception to this is that the entity in itself may also qualify as an investment entity. Hopefully this will mean that for many Financial Institutions who under FATCA and CDOT where uncertain if they would or would not fall under an exemption will hopefully find these rules easier to apply. DBFS will include a longer review of these in our whitepaper on UK OECD/CRS implementation once the final guidelines have been published by HMRC. However, it may require a review for Financial Institutions that under FATCA were exempt to confirm that the exemption applies under UK DAC/CRS.

Participating and non participating jurisdictions

For an interactive map of CRS participating jurisdictions, click the image

Currently 51 jurisdictions have signed an OECD CAA and have committed to implement the regulation for the 2016 or 2017 tax year. An up to date view of which countries have signed up, and for what year, can be found on our interactive map to the right.

It is important to note that the regulation requires reporting Financial Institutions to identify all tax residencies, including customers tax residencies in non-participating jurisdictions. I.e. if a customer is a tax resident in Russia, who has to date not signed up to the OECD/CRS, a UK Financial Institution must collect information and confirm this tax residency. The only exception is US tax residencies, whom will also need to be on boarded as potential FATCA reportable account holders.

Inform your customers

Under UK DAC/CRS there is a stated obligation on the Financial Institution to inform their customer that their data will be shared with HMRC and may be forwarded to other Jurisdictions. The information can either be sent separately, or as part of self-certification forms, and must be provided to the customer prior to 31st of January the year following when the Account was identified as a Reportable Account.

UK DAC/CRS also gives HMRC the power to approach specific Financial Institutions or Tax Advisers and require them to send additional information to their customers in regards to overseas accounts. More details on this power is expected in 2016.

For Financial Institutions that use self certification forms or IRS W-series forms for self certification, the UK DAC/CRS project will need to review current wording of certification forms to ensure that these meet this requirement.

UK DAC/CRS replaces CDOT

As per the draft guidelines, HMRC states that UK DAC/CRS would replace the Crown Dependencies and Overseas Territories Agreement (CDOT). The statement reads “it is anticipated that they (CDOT) will be repealed once the UK and its Crown Dependencies and Overseas Territories start to exchange information under the CRS.” In accordance with this statement, and if there are no delays to UK DAC/CRS, it would mean that there will only be one exchange of information under CDOT, reportable on the 31st of December 2016. As of 2017, all CDOT reporting will be under UK DAC/CRS.

Reporting requirements

UK DAC/CRS Thresholds

One of the first things known about OECD/CRS was that there would be fewer thresholds than FATCA and OECD/CRS.

Under UK DAC/CRS there are no thresholds for Individual Accounts, pre-existing or new accounts. For entity accounts, there is a threshold of $250.000 for pre-existing accounts and no thresholds for new accounts.

The regulation still marks a difference between High Value and Low Value accounts, accounts whose aggregated value is over or under $1.000.000 respectively. Most of these differences are limited to due diligence requirements for identifying Reportable Persons.

Zero Accounts

Another difference is the “Zero Accounts”, i.e. an account that has been reported as a reportable account, will remain reportable even if it has a zero account balance or a negative account balance. Negative balances should be treated as “zero” balances.

Wider definition of Financial Accounts

UK DAC/CRS also requires some additional products to be considered as Financial Accounts. The most noticeable of these being that there is no exception in any of the three regulations for assets regularly traded on an established securities market. This would mean that in UK, as well as any other OECD CRS jurisdiction, exchange traded funds, UK Investment trusts and other listed fund vehicles would be considered as Reportable Accounts.

No FI reporting

Another difference to note is that there is no reporting against Non-Participating Financial Institutions under the UK DAC/CRS. Even the majority of Financial Institutions located in Non Participating Jurisdictions would be exempt from reporting. There are some exceptions though. Certain Investment Vehicles are to be classed as Passive Non Financial Entities if they are located in a Non Participating Jurisdiction.

Registration and identification

Under UK DAC/CRS there is no requirement to register as a Participating Financial Institution; all Financial Institutions in a jurisdiction are participating. This differs from FATCA where one of the first steps to FATCA compliance is the registration as a Participating Foreign Financial Institution, identifying a Responsible Officer and receiving the Global Intermediary Identification Number (GIIN).

While this means less work in the initial stages of a UK DAC/CRS implementation, it does have impact on the onboarding of potential Financial Institutions. GIIN can be used in place of Taxpayer Identification Number (TIN) for reporting purposes, and an account holder that holds a GIIN will be a Non-reportable Account Holder by default.

No sponsorship model

Another difference is that UK DAC/CRS does not have a sponsorship model. Under FATCA, it is allowed that an entity can sponsor multiple entities in the group, allowing a single entity to undertake and submit reports on behalf of the sponsored entities, taking full responsibility for those reports. Under UK DAC/CRS each entity will need to submit its own reports. This is likely to specifically impact Fund Managers and similar entities that regularly manage a large number of funds or similar structures that under these regulations are individual Financial Institutions in their own right.

Taxpayer Identification Number (TIN)

Identifying Account Holders for reporting under UK DAC/CRS (as well as EU DAC and OECD/CRS) requires the collection of Taxpayer Identification Numbers (TIN). This is “the unique identifier assigned to the Account Holder by the tax administration in the Account Holder’s jurisdiction of tax residence” and not a direct reference to US TIN as supplied by IRS.

It is currently uncertain to what extent the reporting Financial Institution is responsible for the correctness of a TIN supplied; initial documents suggested that the Financial Institution should recognise if the TIN is potentially valid and the draft guidelines do not provide further guidance. This could be a problematic area of the regulation. The first challenge is that not all countries issue TINs, or at least not to all tax payers, e.g. France would fall under this category. Secondly, in some countries a Financial Institution cannot request a TIN from individuals, e.g. in Australia you cannot demand the TIN from an individual, and doing so would contravene local laws.

Lastly is the issue of recognising a TIN as potentially valid. Most countries have a number of TINs. For example the UK has at least four, the US has nine, most other countries are likely to have a number of them. In certain cases the TINs will contain information which local banks would as standard use for due diligence. E.g. a Swedish TIN contains information about when and where you were born as well as your gender, and a control digit. There may also be TINs that could not be used for OECD/CRS reporting. Using the US as and example, there is a TIN specific for submitting tax returns on behalf of someone else as well as one for individuals who are adopting a US citizen. If the requirement to “recognize” TINs stands, that does mean that each organisation will need a process in place that can recognize the formats of all recognized TINs and where applicable, highlight non-accepted TIN types.

Achieving CRS compliance efficiently

While there are many differences between UK DAC/CRS and FATCA/CDOT, they are not completely different regulations. A good start for any compliance project will be to review the compliance log for FATCA and identify which decisions and classifications were made to confirm if these are still valid or advisable under UK DAC/CRS. This would also allow for a FATCA implementation review to identify if there are areas of current FATCA implementations that should be reviewed and improved following the completion of the first reporting period. This would be a particularly useful opportunity if the initial FATCA or CDOT implementation was not fully “productionised” or not fully embedded within BAU processes.

For those that are heavily impacted by CDOT it is important to note that current CDOT procedures for onboarding, identification and reporting processes will need to be replaced, and previously onboarded or reviewed accounts may need to be reprocessed.

While it is possible to wait with updating onboarding processes until later in 2016, such an approach is likely to incur additional costs to reprocess onboarding customers at a later date. For Financial Institutions with a large number of customers such an approach could also endanger the timely implementation and reporting readiness as the onboarding will include a larger number of accounts due to lack of threshold under UK DAC/CRS and will include CDOT customers as well.

How can DBFS help

DBFS offers a range of services covering multiple areas of the International Tax Compliance Acts, such as our packaged Tax Treaty Impact Assessment to get a clear view of your organisations readiness, and what changes are required, for FATCA,CDOT and UK DAC/CRS compliance.

DBFS have delivered FATCA and CDOT projects for a large number of clients, spanning from niche financial clients to global institutions with hundreds of entities spanning the globe. Whether or not we are taking on a single work stream or a complete project, we believe in efficien,t to the point regulatory advice and delivery.

DBFS have a number of articles, whitepapers and tools available free of charge. Visit our Tax Treaties portal for more information on UK DAC/CRS, OECD/CRS, FATCA and CDOT. We also publish a number of whitepapers on other regulations, all of which can be found in the news section of our webpage http://www.dbfs.co.uk

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